ELSS or Equity Mutual Fund scheme: A comparison of two equity schemes …!!
Diversification of portfolio is one of the crucial things for an investor. It not only reduces the risk, but also provides a stable return to the investor. A mutual fund is one such investment scheme, which provides diversification as well as generates capital gain for the investor. There are various types of mutual funds such as equity, debt or hybrid mutual fund. But there are various types of fund within a scheme, to suit the needs of investors according to their risk. One mutual fund, which is quite popular among the investor is Equity Linked mutual Fund. Equity Linked Mutual Fund is ideal for the investor, who wants to avoid direct participation in the stock market but want better returns. There are various types of equity linked mutual fund categorized according to the risk levels, such as a diversified equity fund, ELSS (Equity Linked Saving Scheme), Index Fund and Sectoral Fund and Thematic Fund. But the two most important scheme which is a quite popular common investor is Equity Fund and ELSS Mutual Fund.
Mutual Funds that invest main portion of their corpus in the stock market, they are broadly classified as an Equity mutual fund. The major objective of these funds is the capital appreciation or better returns. A major portion of the investment in these funds is invested in the stock market. As these funds are market linked, the returns always depend upon the performance of the stock market. These funds have no lock-in period, but a fixed exit load is attached to it based on the funds invested in it.
ELSS mutual fund is a special category of mutual fund, that offer tax exemption under section 80C.These funds invest most of the corpus in the equity or equity linked product with having a lock-in period of 3 years. It provides better returns compared to the other 80 (C) instrument, which predominantly invest in the fixed income instrument historically. Let’s look at the difference between ELSS vs Mutual Fund.
ELSS Mutual Fund provides an average return between 10% to 15% in the three-year period, but equity mutual fund provides little bit higher returns compared to the ELSS. But there is also a risk factor, an investor needs to carry on itself.
ELSS Mutual Fund carries a lock-in period of three years, whereas there is no such lock-in-period associated with the Equity mutual Fund. So, an investor who wants to invest in the equity fund, they just need to pay an exit load in case, if he redeems his investment.
An investor who invests in ELSS, then he/she gets a tax deduction under the section 80c of the income Tax. It allows a maximum tax deduction of up to Rs 1,50000. But this option is not available in the Equity mutual fund.
- Risk Factor:
Equity linked schemes are linked to the stock market. So, the returns are totally dependent upon the performance of the stock market. There is always an element of risk associated with equity in case of short-term investment. But ELSS has a lock in period of three years, so it does provide protection against any kind of short-term market volatility.
So, depending upon investing goals, risk profile and investment period, an investor can invest in either of these funds.
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*Mutual fund investments are subject to market risks. Please read the scheme information and other related documents carefully before investing.